TMI Blog2009 (1) TMI 315X X X X Extracts X X X X X X X X Extracts X X X X ..... ed or transferred, directly or indirectly by any person free of cost or at concessional rate to an individual, who is/or has been in employment of that person will be regarded as perquisite, a careful examination of the facts of the case before us in the light of the stock option plan in this case, a copy of which is furnished before us, reveals that the stock options were given to the assessee by WLC at fair market value. In the case under consideration, there is no dispute that the options were given at fair market value and without any concession and hence the provisions of s. 17(2)(iiia) would not apply to the facts of the present case, as the grant of option has to be treated as date of acquisition of the shares for the reasons discussed. There is no employer-employee relationship between the assessee and WLC and therefore, the income from grant of option to the assessee cannot be brought to tax as income from salary. Moreover, the options were not granted at any concessional price, rather options were granted to the assessee at prevailing market price which can be understood by definitions part of the stock option plan of WLC. The reliance placed by the ld DR on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a capital assets. On exercising the option, the assessee gets shares, which is only conversion of one capital asset into another capital asset. It is evident from the details of the date of acquisition of such rights by the assessee. as submitted in the paper book, the shares were held by the assessee for a period more than twelve months and hence the resultant gains must be computed as long-term capital gains. Therefore, we uphold the orders of the CIT(A) on this aspect and hold that the capital gains arising out of the sale of shares acquired through ESOPs have to be assessed as long-term capital gains only. Accordingly, grounds of the Revenue on this aspect are rejected. Reliefs u/s. 54 - Since we have held that the proceeds on sale of shares are assessable as long-term capital gains, assessee is entitled for all consequential benefits such as indexation, and all the reliefs u/s. 54 as claimed by the assessee. Cost of acquisition of shares should be taken at the price at which option was granted in favour of the assessee. In view of our decision that there is no element of perquisite arising out of the ESOPs, there is no merit in the contentions of the ld DR base ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as deputy managing director in July, 2000. The assessee has originally filed returns of income for the asst. yrs. 2000-01 to 2002-03 and 2004-05, and those returns have been processed under s. 143(1) of the Act. The major source of income returned by the assessee in the years under consideration is income from capital gains. Assessee was granted employees stock option plan (ESOP) by Warner Lambert Co. (WLC) of USA, which held 40 per cent of the stake in PDIL. The assessee exercised the stock options and after converting into shares, sold the same in the assessment years under consideration as follows: ---------------------------------------------------- Assessment No. of shares received Capital gains year after exercising stock received option and sold ---------------------------------------------------- 2000-01 6,300 1,92,80,796 ---------------------------------------------------- 2001-02 5,145 1,99,66,774 ---------------------------------------------------- 2002-03 10,725 1,86,54,173 ---------------------------------------------------- 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted by the assessee in the respective assessment years. 8. Aggrieved by the above common order of the CIT(A), Revenue has filed the first four of these appeals, viz., ITA Nos. 664 to 667/Hyd/2006; asst. yrs. 2000-01 to 2002-03 and 2004-05. Though elaborate common grounds have been raised in these appeals, the following issues arise for consideration: (a) Whether the surplus gained by the assessee on sale of shares acquired by him under ESOP represent perquisite?; (b) If answer to the above issue is in the negative, whether the gain on the sale of shares under ESOP should be treated as long-term capital gain or short-term capital gain?; (c) Whether the date of acquisition of shares under ESOP is the date of exercise of option or date of grant of the option?; (d) If at all the gain has to be taxed as long-term capital gain, whether the tax rate would be 20 per cent as normally applicable to capital gains; or 10 per cent applicable to listed securities in terms of s. 112 of the Act? 9. Addressing on all the above four issues together, the learned Departmental Representative submitted that the gain of the assessee resulting on sale of shares received by him on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not the date of allotment, and it is only the date of exercise of option, which is crucial. 11. The learned Departmental Representative further submitted that the restriction placed by the RBI, which did not allow the assessee to sell the shares under ESOP, is not a clinching factor for determining the nature of capital gains. 12. She also submitted that while the AO has passed a well-reasoned order, various arguments of the AO have not been considered by the CIT(A) in the impugned order. Relying on the provisions of s. 49(2AA) of the Act, she submitted that where the capital gains arise from the transfer of shares. the cost of acquisition should be taken as per the value taken into account while determining the perquisite under s. 17(2) of the Act. She further submitted that the assessee is given non-statutory stock option, where the price is paid at the time of exercise of option. If the price is not paid till the time of option. the question of the assessee having ownership from the date of grant of option does not arise. As per the circulars issued by the Internal Review Service of US, the taxability of stock option always arises on the date of exercise of option and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his issue was decided in favour of the assessee and against the Revenue. He further submitted that the assessee in the above decision of the Mumbai Bench, viz.. Shri Venkappa Agadi, just as the present assessee, is also an employee of PDIL, and as such that decision squarely applies to the facts of the present case. He also furnished before us a copy of the stock option plan issued by the WLC, and invited our attention to definitions part, viz., Part II-B thereof, wherein the stock option was defined as 'a right granted to an employee by the company to acquire a share of Warner-Lambert stock at the fair market value of such stock on the date the option is granted. He also invited our attention to the definition of the term 'fair market value' thereunder. which was defined as 'price of Warner-Lambert stock on a given date and it is calculated by averaging the high and low per share stock prices as reported on the composite tape of the New York Stock Exchange issues on the option date, exercise date and/or date of sale, respectively'. He also relied on the orders of the CIT(A) with regard to the alternative issues raised by the Revenue in these appeals. 15. In reply, learned Depart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal, in the case of an assessee who is also an employee of PDIL just as the assessee before us in these appeals, we are inclined to hold that the proceeds on the sale of shares of WLC by the assessee in these matters is also to be taxed as long-term capital gains. 17. Even otherwise, it is also pertinent to mention here that even though as per s. 17(2)(iiia) as amended w.e.f. 1st April, 2000, the value of any specified security allotted or transferred, directly or indirectly by any person free of cost or at concessional rate to an individual, who is/or has been in employment of that person will be regarded as perquisite, a careful examination of the facts of the case before us in the light of the stock option plan in this case, a copy of which is furnished before us, reveals that the stock options were given to the assessee by WLC at fair market value. In the case under consideration, there is no dispute that the options were given at fair market value and without any concession and hence the provisions of s. 17(2)(iiia) would not apply to the facts of the present case, as the grant of option has to be treated as date of acquisition of the shares for the reasons discussed in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his issue also and decided the same in favour of the assessee following the decisions of the Bombay High Court in CIT vs. Sterling Investment Corporation Ltd. (1979) 12 CTR (Bom) 263 : (1980) 123 ITR 441 (Bom) and CIT vs. Tata Services Ltd. (1979) 13 CTR (Bom) 227 : (1980) 122 ITR 594 (Bom). 21. At this juncture, we may also notice that there was a significant change in the position on account of amendment to cl. (ba) under s. 115WC(1) of the Act whereby, the date of liability for fringe benefit tax (FBT) on such concessions under ESOP scheme, has been shifted from the date of exercise of option by the employees to the date on which option vests on them. The nature of explanation was a clarificatory one. Option has been defined in the Explanation to this new clause to mean "a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price". Vesting of such right would be date of liability for FBT purpose. This Explanation also fortifies our view that date of vesting the options on the employee shall be the date of acquisition for the purpose of capital gain computation. In the case under consideration, there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his aspect and hold that the capital gains arising out of the sale of shares acquired through ESOPs have to be assessed as long-term capital gains only. Accordingly, grounds of the Revenue on this aspect are rejected. 25. Since we have held that the proceeds on sale of shares are assessable as long-term capital gains, assessee is entitled for all consequential benefits such as indexation, and all the reliefs under s. 54 as claimed by the assessee. Cost of acquisition of shares should be taken at the price at which option was granted in favour of the assessee. In view of our decision that there is no element of perquisite arising out of the ESOPs, there is no merit in the contentions of the learned Departmental Representative based on the provisions of s. 49(AA) that the cost of acquisition should be taken as the value of perquisite taken. As a consequence of our finding that the assessee is entitled for indexation, assessee is liable for tax on capital gains @ 20 per cent only. Consequently, orders of the CIT(A) on these aspects are upheld and the grounds of the Revenue are rejected. 26. In the result, Revenue's appeals ITA Nos. 664 to 667/Hyd/2006 for asst. yrs. 2000-01 to 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, relating to asst. yrs. 1998-99 to 2000-01, only two effective grounds have been taken by the Revenue. They relate to the following issues: (a) Whether the surplus gained by the assessee on sale of shares acquired by him under ESOP represents perquisite?; (b) Whether the gain on the sale of shares under ESOP should be treated as long-term capital gain or short-term capital gain and whether the date of acquisition of shares under ESOP is the date of exercise of option or dale of grant of the option and whether exemption under s. 54EB/54EC/54F are applicable or not? 33. As for the issue against (a) above, facts and circumstances of the case being common, for the detailed reasons discussed in paras 16 to 19 hereinabove. while dealing with the corresponding grounds of the Revenue for the asst. yrs. 2000-01 to 2002-03 and 2004-05 in the matters concerning Dr. Dhurjati Gupta. we hold that the surplus gained by the assessee on the sale of shares acquired by him under ESOP does not represent perquisite. We accordingly uphold the orders of the CIT(A) on this issue and reject the grounds of the Revenue. 34. Similarly, as for the issues against (b) above, for the detailed reasons di ..... X X X X Extracts X X X X X X X X Extracts X X X X
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